'Fiscal deficit is the main focus'

Apurv Gupta, ET BureauFeb 18, 2010, 04.34am IST

There is a need to roll back some of the economic stimulus, to bring down India's fiscal deficit, which, for the Centre and the states combined, pushes 12% of GDP, saysAneesh Srivastava, Chief Investment Officer , IDBI Fortis Life Insurance. Failure to curb the deficit carries the risk of a rating downgrade, he tells ET.

Are there major reasons to worry now? Will earnings in the next few quarters live up to the expectations of the market?

Earnings growth for the next quarter is on track. Concerns today are more from a global macroeconomic scenario. High fiscal deficit in many nations and risk of Dubai-like episodes and sovereign defaults are the key concerns. Besides, there are policy risks as governments and monetary authorities strive to strike a fine balance between growth and inflation.

We have also observed relative strength in the US economy with other two large economies like those of the EU and Japan. Any rise in US interest rates relative to the macroeconomic strength may lead to a stronger dollar and reversal of carry trade, hurting emerging markets including India.

Excess paper supply would hurt only shortterm performance of the market. In the medium-to-long term, it is the valuation and growth of these companies, which would drive these stocks and markets. At the same time, rising inflation is a big cause of worry for the Indian government. We have seen an aggressive move by the RBI when CRR was increased by 75 bps. We expect more action from the RBI to control inflation and bring down inflationary expectations.

What are the reform expectations fromthe Budget?

Reforms in the nature of GST and direct taxes code (DTC) are expected in the coming budget. At the same time, it is necessary to cut down fiscal deficit. Large borrowing programme of government would have negative impact on interest rates and overall health of the economy. India's growth has bounced back and there is a need to roll back some of the stimulus given to the economy. This would help to cut down the fiscal deficit.

But, it is more important for the government to cut down its expenditure. The central and state deficit, including food, fertiliser and oil subsidies, is nearly 12% of GDP. If it is not brought under control, there is a risk of a credit downgrade by rating agencies. If that is controlled and the government borrowings are broadly around Rs 4.5 lakh crore, 10 year G-sec rates would remain between range of 7.75% & 8.25%. Thirteenth Finance Commission recommendation of cutting down deficits in economic upturn and increasing the same at the time of economic downturn is a very good suggestion.